Wanted: Leaders to protect the U.S. Dollar
Following World War II, the world abandoned the bankrupt British Pound Sterling as the world’s reserve currency and turned to the U.S. Dollar (USD). Today, about 85-percent of the world’s commerce is conducted in the USD. In other words, the U.S. enjoys what is, arguably, the world’s most valuable “franchise.” One definition of franchise is: “A ’privilege’ of a public nature conferred on an individual or a body of individuals by a government grant.”
The problem is that a “privilege,” by definition, can be withdrawn by the grantor, meaning if enough world governments decide the financial condition of the U.S. becomes too unstable, they could decide to adopt the currency of some other nation as the world’s reserve currency. Or, a consortium of nations (probably, major oil producers) might create an entirely new reserve currency for the conduct of the world’s business.
The loss of the USD as the world’s reserve currency would be a devastating blow to the U.S. economy. Much worse than having our sovereign credit downgraded from AAA to AA plus.
So, given a nation whose interest payments on its national debt might someday equal the nation’s income, how has the USD been able to hang in there as the world’s reserve currency? That is because the U.S. has the unique ability to print more of the world’s reserve currency. No other nation, unless it resorts to counterfeiting, can legally print the world’s reserve currency.
Today, U.S. Dollars are backed only by the ability of the U.S. Treasury to print more of them. Printing the USD is what keeps the world’s largest Ponzi scheme afloat. If the world dumps the USD, the U.S. will have lost the “franchise” to print more of the world’s reserve currency, meaning the U.S would no longer be the world’s only Super Power.
Fortunately, despite the incompetence of America’s political and financial leadership over the previous four years (one year of Bush and three years of Obama during which the price of gold shot up from $300 to over $1,800 per ounce), the underlying fundamentals of the U.S. economy remain better than those of any other nation.
How long that will remain the case depends on a demonstration by the U.S. Government (USG) that it will cut both discretionary and entitlement spending to the point that the interest on the U.S. national debt does not grow to the point that the interest exceeds our national income.
At least three “entitlement” programs are going to require revision, none of which were even discussed during the recent “bickering” over raising the debt ceiling. They are: Social Security, Medicare, and Medicaid.
Social Security is not a “hand-out” welfare program because the workers, the employers, and the self-employed who have been forced to pay taxes into the Social Security Trust Fund will never get back as much as they have paid in. Plus, they lost the “opportunity cost” of having those tax dollars for investment in higher income producing enterprises. For those reasons, it may be very difficult to get Social Security recipients to reduce or delay their promised benefits.
Medicare, which has extended life expectancies, is a federal insurance program funded, in part, by payroll taxes paid by employees, employers, and the self-employed, by taxes on Social Security benefits, and by taxes levied on the general public by Congress. Using funds from the general public lends a slight “welfare” cast to Medicare, making Medicare a target for those who are opposed, in general, to “welfare.” Medicaid is a federal-state welfare program, making Medicaid an even easier target for cost-cutters.
Bottom line: America must find competent political and financial leaders who will do what is necessary to maintain the USD as the world’s reserve currency. Maybe that’s why we have elections?
Nationally syndicated columnist, William Hamilton, was educated at the University of Oklahoma, the George Washington University, the U.S Naval War College, the University of Nebraska, and Harvard University.
©2011. William Hamilton.